The Gold Price Benchmark Is Looking Outdated. Is the Diamond Benchmark Too?

March 7, 2014byRob Bates

This week brought news of a class-action lawsuit that charges the five banks overseeing the daily gold price fix with manipulating the market.

For those unfamiliar, since 1919, London fix prices have been set twice daily by five banks, in recent years by teleconference. You can read details of this mechanism here.

Detractors note this system is close to a century old and places power in the hands of a few actors, with little transparency or oversight. At least one critic suggests that it be replaced by a system based on electronic trades.

The diamond business, too, has long sought a standard, and for the last four decades, the Rapaport list has been it, even spawning its own lingo (“below Rap,” “above Rap”).

The “Rap sheet” is overseen by Martin Rapaport, who derives it every week based on his reading of the market. I have tremendous respect for Martin (who gave me my start in this business), and he has run “the list” in an ethical and at times courageous manner; in the 1980s, he famously received death threats when the trade thought prices were going too low.

But like the gold price fix, it was born in a different age. Rapaport used to say his list was “shining a light into a dark hole.” Now, the hole isn’t so dark anymore, with trading taking place on the Internet, and prices on Blue Nile and other sites set by dealers in close to real time. (Rapaport has experimented with a second list based on transactions on his trading network RapNet.)

With a little Googling, I was surprised to learn that the issues here aren’t unique to the diamond market, but many commodity prices—including coal, iron ore, fertilizer, gas—are set by similar methods, often by trade publications, according to The Economist:

“The oil price” has a comforting ring of clarity about it. But in reality many benchmark prices for oil and other commodities are merely estimates based on incomplete information from unregulated, illiquid markets. They rely at best on a seasoned reporter’s ability to interpret what his sources tell him about bids, offers and deals, and at worst on a gullible greenhorn’s guesswork.

The European Union, it added, is looking at regulating these price-reporting systems, which has raised the specter of legislating journalism. And there is “a more fundamental problem,” it adds: Some of these commodities aren’t traded that often, so getting a read on prices will always be difficult.

Getting back to the “gold fix,” with all the bad publicity, the current system will likely be fine-tuned and made more transparent, and I wouldn’t be surprised if it does eventually transition to some kind of electronic system—if not now, then down the line. And, perhaps, the diamond market will eventually head down a similar path. In contrast to some of the commodities mentioned, information about the prices of some (but certainly not all) diamonds is out there, sometimes even public; someone just needs a way to synthesize it so that everyone can understand and accept it.